Deck 20: Partnerships: Formation and Operation

Question 1

A partnership is a(n) ______________________________________ entity.

Answer 1

accounting

Question 2

Partnerships need not follow _________________________________________.

Answer 2

GAAP

Question 3

The major categories in which partnerships deviate from GAAP are:
a. _______________________________________________.
b. _______________________________________________.
c. _______________________________________________.
d. _______________________________________________.

Answer 3

a. cash basis instead of accrual basis
b. prior period adjustments
c. use of fair (or current) values instead of historical cost
d. recognition of goodwill in situations not involving business combinations

Question 4

A contra-capital account used by partnerships is called the ___________________________________________ account.

Question 5

When a partnership is being formed, equity dictates that noncash assets contributed to the partnership be recorded at their ____________________________.

Question 6

The fundamental objective underlying much of partnership accounting is that of __________________________________________.

Question 7

A method of allocating profits and losses among partners that has the advantage of preventing potential inequities among partners in the event of liquidation is _________________________________________.

Question 8

An alternative to the partnership form of organization is the ____________________________________________________________.

Question 9

A partnership is a taxable entity.

Question 10

A partnership is a tax-reporting entity but not a tax-paying entity.

Question 11

In a general partnership, only a majority of partners need to have unlimited liability to partnership creditors.

Question 12

In a general partnership, profits and losses are shared equally among all the partners.

Question 13

When a partnership agreement has provisions that are contrary to state laws pertaining to partnerships, state law is controlling.

Question 14

Partnerships are separate legal entities, like corporations.

Question 15

A partner's drawing account is merely a contra-capital account.

Question 16

A partner's drawing account is substantively a loan account.

Question 17

Partners are also employees if they are active in the business of the partnership.

Question 18

Theoretically, salary allowances paid to partners should not be reflected as salary in the general ledger.

Question 19

Interest on partnership capital is mandatory under the Revised Uniform Partnership Act in dividing profits and losses.

Question 20

Under the Revised Uniform Partnership Act, partnerships must follow GAAP.

Question 21

_____ The partnership form of business is

A) An economic entity.
B) A separate legal entity, just as a corporation is a legal entity.
C) A taxable entity.
D) A fiscal entity.
E) None of the above.

Question 22

_____ The professional corporation form of business is

A) A joint venture.
B) A nontaxable entity.
C) A legal entity.
D) An entity only for tax-reporting purposes.
E) None of the above.

Question 23

_____ When a partnership is formed, equity dictates that assets contributed to the partnership be recorded in the general ledger at their

A) Adjusted tax basis.
B) Fair (or current) value.
C) Replacement value.
D) Book value.
E) Historical cost.

Question 24

_____ A unique feature of partnerships (compared with publicly owned corporations) is that

A) They do not have to follow GAAP.
B) They are not governed by state laws.
C) Their books have to be maintained on the tax basis.
D) They do not file income tax returns.
E) None of the above.

Question 25

_____ A partner's drawing account, in substance, is

A) A capital account.
B) A contra-capital account.
C) A loan account (a loan from the partnership).
D) A salary expense account.
E) None of the above.

Question 26

_____ Under the Revised Uniform Partnership Act,

A) Interest must be imputed on partnership capital in dividing profits and losses.
B) Partners active in the management of the business must be given a salary allowance in dividing profits and losses.
C) GAAP must be followed.
D) Some of the partners need not be general partners.
E) None of the above.

Question 27

_____ A distinct and major advantage of the professional corporation form of organization in comparison with the partnership form of organization is

A) Limited liability with respect to damages arising from professional services.
B) Greater allowable tax deductions for retirement plans.
C) Ease of formation.
D) Exemption from federal taxation of the first $100,000 of earnings.
E) None of the above.

Question 28

_____ A partnership is formed by two individuals who were previously sole proprietors. Property other than cash that is part of the initial investment in the partnership would be recorded for financial reporting purposes at the

A) Proprietor's book values or the fair value of the property at the date of the investment, whichever is higher.
B) Proprietor's book values or the fair value of the property at the date of the investment, whichever is lower.
C) Proprietor's book values of the property at the date of the investment.
D) Fair value of the property at the date of the investment.
E) None of the above.

Question 29

_____ Cody and Paul formed a partnership on 4/1/06 and contributed the following assets:
The land was subject to a mortgage of $30,000, which was assumed by the partnership. Under the partnership agreement, Cody and Paul will share profit and loss in the ratio of one-third and two-thirds, respectively. Paul's capital account at 4/1/06 should be

A) $300,000
B) $330,000
C) $340,000
D) $360,000
E) None of the above.

Question 30

_____ Luca and Mira formed a partnership on 7/1/06 and contributed the following assets.
The realty was subject to a mortgage of $25,000, which was assumed by the partnership. The partnership agreement provides that Luca and Mira will share profits and losses in the ratio of one-third and two-thirds, respectively. Mira's capital account at 7/1/06 should be

A) $400,000
B) $391,667
C) $375,000
D) $310,000
E) None of the above.

Question 31

_____ On 7/1/06, Burr and Lapp formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Burr contributed a parcel of land that cost him $25,000. Lapp contributed $50,000 cash. The land was sold for $50,000 on 7/2/06--one day after the partnership's formation. How much should be recorded in Burr's capital account upon partnership's formation?

A) $10,000
B) $20,000
C) $25,000
D) $50,000
E) None of the above.

Question 32

_____ On 7/1/06, Pane and Sills formed a partnership, and each contributed assets with agreed-upon values as follows:
The building is subject to a mortgage loan of $100,000, which is to be assumed by the partnership. The agreed-upon value of the building is $50,000 more than its tax basis of $300,000. The partnership agreement provides that Pane and Sills share profits and losses 60% and 40%, respectively.
Using this information, on 7/1/06, the balance in Sills's capital account should be

A) $380,000
B) $330,000
C) $300,000
D) $280,000
E) None of the above.

Question 33

_____ The partnership agreement of Jones, King, and Lane provides for annual distribution of profit or loss in the following order of priority:
a. Jones, the managing partner, receives a bonus of 20% of profits.
B. Each partner receives 15% interest on average capital investment.
C. Residual profit or loss is divided equally.

How much of the $90,000 partnership profit for 2006 should be allocated to Jones?

A) $15,000
B) $27,000
C) $30,000
D) $33,000
E) None of the above.

Question 34

The partnership agreement for the partnership of A and B provides for the division of profits in the following manner:
a. For salary allowances--but only to the extent available.
b. For imputed interest on capital--but only to the extent available.
c. For any remaining profit in the profit and loss sharing ratio of 3:2.
For 2006, the profit before salary allowances and imputed interest was $60,000. Other data follow:
Required:
Calculate the division of profits for 2006.

Question 35

From a tax perspective, a partner's interest in a partnership is a(n) ______________________________________________________.

Question 36

Income tax laws concerning partnerships are centered on the concept of _________________________________________________.

Question 37

For income tax-reporting purposes, a partner's ___________________________________________________ as recorded in the general ledger is not relevant.

Question 38

Income tax laws pertaining to partnerships are not structured around partners' capital balances as reflected in the general ledger.

Question 39

For tax purposes, a partner's interest in a partnership is referred to as his or her tax equity.

Question 40

For tax purposes, a partner's tax basis increases as a result of profits.

Question 41

When a partnership borrows money from a financial institution, the tax basis of each of the partners increases.

Question 42

_____ For tax-reporting purposes,

A) A partner's tax basis is the balance in his or her capital account.
B) Losses of a partnership increase tax basis.
C) Cash withdrawals decrease tax basis.
D) The assumption of debt by a partnership relating to an asset contributed by a partner increases the adjusted tax basis of the asset contributed.
E) None of the above.

Question 43

_____ On 7/1/06, Pane and Sills formed a partnership, and each contributed assets with agreed-upon values as follows:
The building is subject to a mortgage loan of $100,000, which is to be assumed by the partnership. The agreed-upon value of the building is $50,000 more than its tax basis of $300,000. The partnership agreement provides that Pane and Sills share profits and losses 60% and 40%, respectively.
What is the tax basis of Sills on 7/1/06?

A) $330,000
B) $380,000
C) $300,000
D) $280,000
E) $270,000

Question 44

_____ In January 2006, Conn and Krete formed a partnership, each contributing $50,000 cash. The partnership agreement provided that Conn would receive a salary allowance of $30,000 and that partnership profits and losses (computed after deducting Conn's salary) would be shared equally. For the year ended 12/31/06, the partnership's operations resulted in a profit of $48,000 after Conn's salary allowance. The partnership had no outstanding liabilities as of 12/31/06. Conn was paid in cash $22,000 of his salary allowance of $30,000. What is the amount of Conn's partnership tax basis as of 12/31/06?

A) $104,000
B) $82,000
C) $74,000
D) $52,000
E) None of the above.

Question 45

_____ When a partnership borrows money from a financial institution, the effect on the tax basis of each of the partners is

A) An increase
B) A decrease
C) No effect
D) An increase or decrease depending on whether the partner's tax basis is positive or negative.
E) None of the above.